What Is a Turnkey Business?
Advantages and Disadvantages of Turnkey Businesses
A turnkey business is a business that includes everything you need to immediately start running the business, as opposed to having an idea for a product or service and developing a business from scratch.
In a turnkey business, a successful business model is already in place, and the products or services have been defined and proven, so the startup phase is complete. The phrase "turnkey" is meant to imply that little work is required by the buyer other than opening the door to customers and good customer service.
Examples of Turnkey Businesses
The most common type of business sold as a turnkey business is a franchise. In the case of franchises, a turnkey business often includes a building that has been constructed to the franchise's specifications and an exclusive territory. Tim Horton's restaurants and Subway are examples of turnkey franchise businesses.
The other common way to acquire a turnkey business is to buy an established business. There are always plenty of businesses for sale. According to BizBuySell, a record 7842 small businesses were sold in 2016.
While business sales are influenced by many factors including a strengthening economy and low-interest rates, a large percentage of businesses sold were by retiring baby boomers. Given that this is a demographic trend that is expected to last for the next few decades there will continue to be plenty of opportunities for entrepreneurs to take over established, successful businesses.
Advantages of a Turnkey Business
The biggest advantage to buying a turnkey business is that the business model has already been proven, so most of the risk and uncertainty is eliminated. Established businesses or franchises have a much lower failure rate than independent startup businesses. The buyer does not need to worry about whether the product or service will sell or not so they can focus on running the business. Often the facilities, equipment, and in the case of an independent business, the employees are included in the sale, making the takeover process even simpler.
In the case of franchises such as Tim Horton's, for example, everything from the restaurant location to the menu is predefined for the buyer. In return, the buyer pays startup fees, franchise fees, and must purchase supplies and equipment from Tim Horton's. The company provides training, national marketing, and assistance with management.
In addition to the above advantages, purchasing a well-established, existing business has a further benefit in that the customer base is already present.
Disadvantages of a Turnkey Business
Buying an established business or franchise requires a substantial investment. For a franchise such as Tim Horton's, for example, you must have $1.5 million in net worth and $500,000 in unencumbered capital. The franchise fee for a 20-year Franchise Agreement is $50,000.
Franchise businesses are typically very restrictive. The owner has much less control over how the business is managed and operated versus an independent business. For instance, the contractual requirement to purchase equipment and supplies from the head office means you cannot obtain these items from less expensive sources.
Entrepreneurs considering buying a franchise business should always do their due diligence and be sure they know exactly what a particular turnkey operation includes. Not all franchise businesses are created equal, and to complicate things even more, franchise legislation differs from place to place if it exists at all.
Purchasing an existing independent business also requires careful investigation. It is important to find out why the business is for sale. The company may have recently lost a large contract, has a huge tax liability, or otherwise might be in decline due to competition or other factors.
Proper business valuation can be difficult for the buyer of an independent business. A business that is being sold as a turnkey business normally includes tangibles such as inventory and equipment through intangibles such as a previously established reputation and goodwill. Tangible assets are normally simple to value but intangibles can very difficult.
A proper examination of the company financials with the assistance of a professional accountant or business valuator is vital before making an offer to purchase a business.